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Investing in Stocks |
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What is a stock?
A stock is a share of a business, giving you partial (usually temporary) ownership of a company. When you buy a stock, you pay for a fraction of all the assets (including furniture, buildings, computers, etc.) and earnings of that company. Ownership of stocks gives you the label shareholder or stockholder. So, in short, a stock represents the percentage of the company that is owned by you.
What are the benefits of investing in stocks?
When you are a shareholder of a company, you receive part of the company earnings, based on the number of stocks you own.
If you have invested in a considerable amount of stocks in one company, it gives you a say in the decision making process of that company. Here again, your power is directly proportional to the number of stocks you own. While a few stocks may give you the right to vote on important matters with regard to the company, a considerable share may win you a seat in the board of directors. If you own more than half the shares, this means that you effectively own the company. Of course, this is not as simple to achieve as it sounds.
There are four levels of stocks, such as penny stocks, growth stocks and blue chips. Penny stocks are issued by small companies and are typically of no value. Growth stocks have potential but are low in stability. Secondary public issues are reliable because they are offered by established companies. Blue chips are the highest and the safest level of stocks but here, the dividends take a longer time to materialize
What are the different types of stock?
There are 2 basic types.
- The Common stock is the most popular and the most prevalent. They give the shareholder voting rights. This type is high on returns than almost every other investment, over the long term. But then, common shareholders are at risk because they are the last to receive money if a company faces bankruptcy and there are no guarantees.
- The preferred stock does not usually offer voting rights, as the common stock. Instead shareholders are allocated a fixed return. So they are not negatively affected by the turnout of the company. In the event of liquidation of a company, they are paid before common shareholders. The downside is that the company can buy the shares back from the shareholder at any given time.
How are stocks traded?
Buyers and sellers meet on exchanges and agree on a price. Trading can be physical, (where traders actively and noisily compete on a trading floor to get the best deals) or virtual, where the deals are sealed electronically. The stock market lowers the risk of investing by facilitating exchange of securities between the buyer and the seller.
What changes stock prices?
Based on various market forces, such as supply and demand, stock prices fluctuate everyday. If the demand for a stock is higher than the supply, the stock price rises and vice versa. This concept is easy enough to understand but it’s harder to predict what stocks will be in demand and what will be frowned upon. The price change of a stock will indicate what investors think a company is worth.
What is meant by a bull market and a bear market?
A bull market is a positive representation of the economy. The stock market flourishes and this makes it easier to pick stocks. One thing you have to keep in mind is that stocks may be overvalued in such a situation.
A bear market means a struggling economy. Recession is hinted at and stock prices fall. This makes it difficult for investors to obtain profitable stocks. |
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